India-EU FTA: dead in the water?

Despite the potential for an increase in trade, formal negotiations between India and the EU on a proposed free-trade agreement (FTA), formally called the Broad-based Trade and Investment Agreement (BTIA), are unlikely to resume in the forecast period (2018‑22) owing to diverging views on the terms of the agreement. Moreover, the trade deal is unlikely to be at the top of the foreign policy agenda of either India or the EU in 2018‑22.

India and the EU have been in negotiations for the BTIA since 2007. However, despite efforts from both parties, there has been no progress on negotiating the terms of the agreement due to several differences on both sides, and progress on formal talks has stalled since 2013.

At the 2017 India-EU summit, the two sides agreed to resume negotiations on the BTIA. In June 2018 India's external affairs minister, Sushma Swaraj, paid an official visit to Brussels, where she met the president of the European Commission, Jean-Claude Juncker. However, talks failed to achieve any breakthrough on the trade-deal impasse, as discussions focused on appraising existing ties rather than restarting the dialogue on the FTA.

Navigating complexities

The EU has long relied on the UK's relationship with India to help to shape the agenda for its trade engagement with India. The UK's impending exit from the EU could provide a new opportunity for the EU to upgrade its ties with India. Trade between the bloc and India is still restricted by several barriers, such as high tariffs on certain EU exports to India, and growth in trade has been subdued in recent years. EU exports to India reached US$47.2bn in 2017, only 17.5% higher in value terms than in 2007, despite India's phenomenal economic growth over the past decade. India is still only the EU's ninth-largest trading partner, and there remains immense scope for an increase in trade.

India's demand for a more liberal visa regime in the UK (home to the largest Indian diaspora in Europe) has long been an obstacle to deepening India-EU economic relations. The UK has historically been a favourite destination in Europe for Indian migrants, and the UK has therefore been opposed to demands to relax visa requirements for Indian workers. However, although the UK is set to exit the EU, the visa regime will remain a sticking-point for trade negotiations, as the EU is still unlikely to agree to India's proposals on visa liberalisation. Differences also persist around the EU's push to get India to cut duties on its imports of vehicles, alcohol and dairy products. India is reluctant to do so, given its protectionist slant favouring domestic industry.

India also wants the EU to grant it the status of a "data-secure nation". This status would substantially reduce compliance costs for Indian software companies working in the EU. However, given concerns over regulatory norms and data-privacy standards, the EU is unlikely to budge on this in the forecast period.

Furthermore, the EU is pressing India to improve protections for workers and intellectual property (IP). The issue of IP protection is particularly crucial for the pharmaceutical sector. The US has also pressurised India on the same issue, and India featured on the 2018 Special Report 301 on IP rights compiled by the Office of the US Trade Representative identifying trade partners that do not adequately guard or enforce IP rights. We do not expect a significant improvement in India's IP protection standards in 2018‑22, which will continue to limit the prospects of an India-EU FTA in the period.

Attention deficit

Historically, India has tended to focus on its ties with some of the largest EU members, particularly the UK and France. This has historically left India's diplomatic relationship with the wider EU relatively weak and largely revolving around a series of annual discussions (established around the India-EU Joint Commission framework). Meanwhile, India's diplomatic priority currently focuses on countering China's growing economic and military influence in South Asia. This has also resulted in India being drawn closer into groupings based around the Indo-Pacific. This has been complemented by the government's Act East policy, which has deepened engagement with East and South-east Asian countries such as Vietnam and Japan.

The EU, meanwhile, is preoccupied with internal tensions and its fraying relationship with the US under the presidency of Donald Trump. Rising protectionism in the US has created a situation where other players, including the EU, are looking to support the multilateral trading system by diversifying trade partners and developing new trade agreements. This was highlighted by the signing of the Economic Partnership Agreement (EPA) between the EU and Japan in July. Both the EU and India would benefit from the trade deal, were it to happen. India is a rapidly growing economy, with an expanding middle class, providing opportunities for EU businesses. Meanwhile, investment by European businesses would provide support to job creation in India. India's software services exports could also receive a fillip if the trade deal went through. Thus, there are strong arguments in favour of the trade deal.

However, differences between the EU and India on the BTIA are deep, and therefore formal negotiations are unlikely to restart in 2018‑22. India has a rich bilateral partnership with several EU member states, based on co-operation on defence and scientific matters. Consequently, the relationship between the EU and India will deepen over the next five years, even as talks on the FTA remain in limbo.